The European Commission has announced plans to overhaul the VAT system for intra-community supplies of goods within the EU. The current interim system taxes supplies based on the origin principle, but a new definitive system beginning in 2019 will reverse this and tax supplies based on the destination principle instead. Under the new system, a supply from one country to another will be taxed in the destination country rather than the origin country. The Commission also proposes new rules for certified taxable persons and a "one-stop shop" for suppliers to account for VAT in other member states.

1. Briefing paper: EU Commission
announces major overhaul of VAT system
The European Commission has published draft legislation in the form of a draft Directive aimed
at implementing a number of short-term measures to combat VAT fraud and (from 2019) a major
overhaul of the VAT system in relation to the intra-community supply of goods. Originally, the
preferred VAT system for Europe was intended to be a system based on the concept of taxation
in the supplier’s country (the origin system). The proposed new measures will culminate in a
system based on the concept of taxation in the country of consumption (the destination
system).
What’s the issue
The European Commission has announced that, as part
of its ‘future of VAT’ programme, it has introduced
draft new legislation that will, if adopted, see the
European Union adopt a system of indirect taxation
which is based on the destination principle. This is a
complete reversal of the original intended system which
was for one based on the origin principle. The original
concept was to tax supplies of goods in the country
where the supplier belongs. For example, where a
supplier in the UK supplied goods to a customer in
Germany, that supply would be subject to UK VAT at
the prevailing UK VAT rate at the time of supply.
Unfortunately, for both political and economic reasons
that original concept could not be implemented. In
1992, when the single market was adopted, interim (or
transitional) measures were introduced until such time as
the political and economic issues could be resolved. The
transitional system has been in force ever since.
Interim system
From January 1993, the VAT system in the European
Union has operated under a transitional regime. The
regime provides an exemption from VAT in the country
of origin with the VAT registered customer in another
Member State being required to account for VAT on the
acquisition of the goods in his country through the
payment of acquisition VAT. In most cases, such
acquisition VAT then being reclaimed by the acquiring
taxable person to the extent that the goods were used or
to be used by him in making taxable supplies.
The system relies on the suppliers of goods to VAT
registered businesses in other Member States completing
a recapitulative statement (known in the UK as the EC
Sales list) and the customer making accurate acquisition
VAT declarations on its own VAT returns.
The proposed new system
From 2019, the Commission proposes to introduce
the ‘definitive’ VAT system throughout the EU. The
new system is the complete reverse of the original
proposed system and will tax the supply of goods in
the Member State of consumption. For example,
where a UK business supplies goods to a German
customer, the supply will be deemed to be a German
supply of goods taxable in Germany.
The exact detailed technical rules for how the new
system will be operated will be provided during 2018.
The current proposal is merely to set the direction of
travel and provide a framework. In addition, further
changes will also be needed to the arrangements
between Member States in relation to administrative
cooperation and in relation to IT developments.
Intra-Union Supplies
The new system will introduce a new concept of
supply known as an intra-union supply. This will be a
single event and will replace the existing two event
procedure (ie the exempt supply in the Member State
of departure followed by a taxed acquisition in the
Member State of destination). Such supplies will be
deemed to take place under the ‘place of supply’ rules
in the Member State of arrival of the goods.
Liability to pay VAT
Under the new system, the supplier will be required to
pay any VAT due in the Member State of destination
unless the customer acquiring the goods is a certified

2. © 2017 Grant Thornton UK LLP. All rights reserved.
'Grant Thornton' refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires.
Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are
delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another's acts or omissions.
This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.
www.grant-thornton.co.uk
taxable person. In such cases, the customer will be
required to account for any VAT due on the intra-
union supply.
In cases where a customer is not a certified taxable
person and the supplier is not registered for VAT in
the Member State of destination, he will be able to
account for any VAT due in that Member State by
making appropriate declarations using a so-called
One-Stop Shop (similar to the MOSS system
currently used by suppliers of electronic services to
consumers in other Member States. The One-Stop
Shop will also allow for input VAT incurred in other
Member States to be reclaimed.
Although the detailed rules are, as yet, unknown, the
EC Sales list should become a thing of the past when
the new definitive destination system is introduced.
Certified Taxable Person
As stated above, where goods are supplied to a
certified taxable person, the supplier in a different
Member State will be relieved from any obligation to
account for or pay any VAT due in the customer’s
country. It is necessary, therefore, for the VAT law to
stipulate exactly what is meant by that term.
Accordingly, the Commission proposes to introduce
new legislation to define what is meant by a certified
taxable person. The concept will mean that such
businesses will be recognised globally as reliable
taxpayers.
To combat VAT fraud, this concept will be
introduced in due course by implementing
regulations. Such regulations will cover the
procedures for granting and withdrawing certified
status and for ensuring a uniform approach to the
concept across the European Union.
Other proposals
The Commission has also announced a number of
other proposals aimed at dealing with a variety of
other VAT issues. Under current VAT rules, a person
transferring his own goods to another Member State
as ‘call-off stock’ is, generally, required to register for
VAT in the Member State where the goods are
located. This allows for VAT to be accounted for on
the arrival and subsequent supply of the goods in the
other Member State. The Commission is proposing to
treat these movements as a single supply in the
Member State of departure and an intra-community
acquisition in the country where the stock is
subsequently located. This new rule will only apply
however where the supplier and the customer are
certified taxable persons.
Intra Community Acquisitions
In an attempt to reduce the incidence of carousel
fraud, the Commission has also proposed an
amendment to the existing rules on intra-community
acquisitions. Existing VAT law not only requires the
acquirer of goods to provide his VAT identification
number but it also requires the supplier to complete
and return a recapitulative statement (the EC Sales
List). Both requirements are formal conditions. For a
business to obtain goods from a supplier on a VAT
free basis he must provide a valid VAT number. As a
formal condition, the Court of Justice has ruled that
non-compliance with the requirement to provide a
VAT identification number cannot itself lead to a
denial of the VAT exemption for the supply of goods.
A Member State may impose a penalty for non-
compliance but it cannot deny the exemption. It is
only where substantive conditions are breached that
the exemption can be denied so, at the request of the
Member States, the Commission has proposed that
the provision of a valid VAT identification number
should become a substantive condition. It is also
proposed to make the requirement to complete a sales
list a substantive condition such that failure to file a
Sales List can lead to denial of the exemption (zero-
rating in the UK) for the supply of the goods. The
VAT Directive is to be amended to reflect these
changes.
Chain Transactions
New rules will also be introduced to regularise and
provide legal certainty throughout the EU as to
exactly which supply (within a chain of transactions) is
to be regarded as the transaction involving the
transportation of the goods and thus treated as an
exempt (zero-rated in the UK) supply.
Grant Thornton
Grant Thornton has a national team of VAT and
Customs specialists. If you wish to discuss any aspect
of these proposals, please contact your usual Grant
Thornton advisor.
Name
Grade
T +44 (0)
E
Name
Grade
T +44 (0)
E